Explaining the catalysts that move the "market" overnight has become so farcical it is practically an exercise in futility and absurdism.
China is looking to succeed where the United States has failed. Beijing — which, as a reminder, claims it will not use its regional infrastructure development initiatives as a tool of foreign policy — is now set to facilitate the construction of nearly $50 billion in power plants, roads, and railways in neighboring Pakistan. The proposal, which will give China access to the Indian Ocean via the Gwadar port on the Arabian Sea, is part of President Xi Jinping’s ambitious “Silk Road” Economic Belt, and importantly, will likely include financing for the completion of the "Peace Pipeline," which will carry natural gas from Iranian gas fields across Pakistan.
It is only fitting that the next business day following a headline that "Global Futures Slide China Tumbles On Short Selling Boost" we would see China, in an apparent panic, not only cut its RRR by 100 bps to 18.5% - far more than expected and the most since 2008 - but, more importantly, hinted that the Friday regulatory decision to encourage short sales and tighter margin rules on "umbrella trusts" was in no way meant to pop that the Chinese stock bubble, ridiculous as it may be. End result: after Chinese futures crashed by up to 6% on Friday after the Shanghai close, overnight the SHCOMP was down just 1.64%, erasing the bulk of the futures loss. More importantly, US equity futures have seen a strong bid this morning in yet another attempt to defend not only the Apple Sachs Industrial Average from going red on the year but the all important 100 DMA technical levels.
Financial engineering is one of the worst ills perpetuated by the Fed’s regime of cheap debt and money market subsidies for speculation. And these deformations are turbo-charged by the tax code which creates a powerful bias toward loading capital structures with tax deductible debt, and to delivering returns as lightly taxed capital gains rather than ordinary income. In fact, stock buybacks and LBOs are the bastard offspring of the IRS and Federal Reserve.
Just as China was closing for trade and Europe was opening, something previously unseen happened: no, not another another GPIF or Virtu inspired marketwide stop squeeze, those are quite recurring these days. It was virtually every Bloomberg terminal around the globe suddenly going dark.
Following February's big bounce back MoM, Consumer Prices in March rose 0.2% MoM (less than the expected 0.3% rise) but it is YoY that is the great news for Americans. CPI fell 0.1% YoY in March (below expectations of unch) which means Consumer Prices haven't risen YoY in 3 months. However, while this clear disinflationary signal is peersisrtent, Core CPI continued to rise 1.8% from last year (above the 1.7% consensus) driven by big jumps in the cost of shelter (thank you Fed) and healthcare (thank you Govt); which should send shivers through the risk-bulls as The Fed may be forced to pull rate hikes forward.
Just as the S&P appeared set to blast off to a forward GAAP PE > 21.0x, here comes Greece and drags it back down to a far more somber 20.0x. The catalyst this time is an FT article according to which officials of now openly insolvent Greece have made an informal approach to the International Monetary Fund to delay repayments of loans to the international lender, but were told that no rescheduling was possible. The result if a drop in not only US equity futures which are down 8 points at last check, but also yields across the board with the German 10Y Bund now just single basis points above 0.00% (the German 9Y is now < 0), on its way to -0.20% at which point it will lead to a very awkward "crossing the streams" moment for the ECB.
"We could now be at a crossroads," warns Deutsche Bank in its annual default study report. As the 'artificial bond market' is exposed and yield curves flatten on Fed rate hikes so carry risk-reward is reduced and default cycles have often been linked to the ebbing and flowing of the YC through time with a fairly long lead/lag. With HY defaults having spent 12 of the last 13 years below their long-term average (with the last 5 years the lowest in modern history), "a perfect default storm could be created for 2018 if the Fed raises rates in 2015."
Water and energy have a symbiotic relationship. Energy is needed to move water to people and businesses. Water, in turn, is necessary to produce energy. But how much...
- Shale Oil Boom Could End in May After Price Collapse (BBG)
- Oil above $58 on U.S. shale output report, Mideast (Reuters)
- Ackman Says Student Loans Are the Biggest Risk in the Credit Market (BBG)
- Alibaba Disputes U.S. Group’s Claim it Tolerates Fake Goods on Taobao (WSJ)
- Petrobras takes steps to avert a technical default (FT)
- Yen’s Drop Is Approaching Its Limit, Says Abe Adviser Hamada (BBG)
- 'Slicing and dicing': How some U.S. firms could win big in 2016 elections (Reuters)
- Fed official warns ‘flash crash’ could be repeatedv (FT)
The Middle East’s ongoing descent into chaos and China’s impending ascendancy to the status of global superpower are just two of the many threats that the US, European Union and Russia all share. Each of these issues should certainly occupy a higher position on their respective agendas than the breakup of Ukraine or the insolvency of Greece. Leaders of all three governments would be well-advised to set aside their differences, or at least to prevent those differences from obstructing cooperation on more important issues. Unlike its predecessor, the Second Cold War will not be bilateral. Today’s world is far more chaotic, kinetic and dangerous than it was fifty years ago.
- Nikkei tops 20,000, Europe hits 15-year high (Reuters)
- GE to sell real estate holdings, sets $50 billion share buyback (Reuters)
- Iran’s Middle Class Plans for Life After a Deal (BBG)
- Walgreens to Close 200 Stores as It Expands Cost Cuts (WSJ)
- Hillary Clinton expected to announce presidential run as soon as this weekend (Reuters)
- It will cost $1.5 billion to keep Deutsche Bank Libor Manipulators out of prison (USA Today)
- Police Cameras Bring Problems of Their Own (WSJ)
- Obama says concerned China bullying others in South China Sea (Reuters)
- Investors Revive Appetite for Asian Junk Bonds (WSJ)
ISIS, in possible cooperation with rival al-Nusra, has taken control of a strategic Syrian refugee camp in Damascus just miles from Bashar al-Assad's Presidential palace, prompting Palestinian militimen to rethink their allegiances and plunging the camp — where 18,000 people are trapped — into what the UN Secretary General calls "the darkest circle of hell."
"The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September," Bloomberg writes, noting that the very same Wall Street banks on the hook for the hedges also financed the shale boom.
- Greece pleads cash running out, told to hasten reforms (Reuters)
- ECB Cash Said Likely to Fall Short of Greek Request This Week (BBG)
- Chinese Stock Buying Frenzy Sweeps Into Hong (WSJ)
- Shell’s $70 Billion BG Deal Meets Shareholder Skepticism (BBG)
- Yemen's Houthis seize provincial capital despite Saudi-led raids (Reuters)
- Iran Nuclear Deal Gives Syria’s Bashar al-Assad Reason to Worry (WSJ)
- Slow apps, low battery life limit appeal of Apple Watch (Reuters)
- Gilead’s $1,000 Pill Is Hard for States to Swallow (WSJ)
- The Oil Industry's $26 Billion Life Raft (BBG)